Chickens coming Home to Roost

What happens to your bank when you overlook due diligence in lending, borrow money from the Fed at near zero interest rates but lend it out to very few people at  10 to 20 times the inflation rate, slack off on renegotiating loans,  charge customers fees on everything, and engage in practices that basically drain resources from your clientele?  Well, your customers eventually suffer so much economic destress they start bringing you down with them by defaulting.  Big US banks are suffering because their customers are suffering.  Kind’ve Karmic isn’t it?  Well, it’s karmic in the sense that that’s what you get from engaging in really short-sighted bad business practices made to enrich your executives and prop your stock prices up over actually doing your core business intelligently.

Fears about the health of US consumer balance sheets grew on Monday as Citigroup and Wells Fargo joined JPMorgan Chase in reporting new signs that homeowners and credit-card borrowers are falling behind on their payments.

The banks’ third-quarter results were hit by expected declines in investment banking, reflecting turbulence in global markets. But the reports also revealed weakness in the consumer side of their businesses – with mortgage delinquency numbers suggesting that record low mortgage rates and government loan modification programmes are failing to help a large swathe of homeowners.

Overall revenues fell 8 per cent at Citigroup year-on-year and 6 per cent at Wells, sending their shares down 1.7 per cent and 8.4 per cent, respectively. The S&P 500 index fell 1.9 per cent.

Wells said delinquencies of more than 90 days in its main portfolio of consumer loans – including mortgages and credit cards – rose 4 per cent to $1.5bn, the first increase since 2009. Early stage delinquencies in its retail business remained flat at 6.13 per cent after falling for three quarters. The bank increased its provision for consumer-banking losses for the first time in two years.

“The economic recovery has been more sluggish and uneven than anyone anticipated,” said John Stumpf, Wells chief executive

Federal policy that emphasizes bailing out failing businesses while leaving their customers high and dry with extremely high unemployment rates and costs of borrowing and living is having ongoing effects. Here’s some more info on banks beefing up their loan loss reserves from that FT article.

JPMorgan last week increased its provision for losses on consumer loans to $2.3bn from $1.9bn in the previous quarter. JPMorgan said delinquencies on goverment-insured mortgages hit $9.5bn, up from $9.1bn in the second quarter and $9.2bn a year ago.

“The residential mortgage problems are unprecedented,” said Gerard Cassidy, analyst at RBC Capital. “The rate of improvement in the delinquencies has slowed down dramatically in the last two years and even over the more recent quarters.” He said the problems were no longer in “subprime” but “prime” mortgages.

Capital One, among the top six US card issuers, reported rising 30-day delinquencies in June and July. “Defaults on credit card debt are certain to rise from here,” said James Friedman at Susquehanna Capital Group.

So, what’s not to be surprised about given that the unemployment rate has been sitting around 9% now for three years in a row?   All of these really bad metrics on consumer finances should be signalling policymakers to act.  But, that’s not happening.  Well, not unless you count all the finger pointing at Ben Bernanke.  I am continually flummoxed by the inability of every one in policy circles to get the basic economics right. The obsession with austerity is killing this country and it’s doing the same in others. The data just screams ongoing murder.

Here’s some thoughts on the absolute disconnect of policy from reality from Josh Bivens at the Economic Policy Institute Blog who also can’t figure out why nuts and bolts economics has suddenly been termed radical.  If we’d have done something differently about three years ago, these  statistics that indicate horrible stress on US households could’ve been dealt with by now.  It’s odd that the very policymakers that were so concerned about Banks and Businesses have no problem slowly killing their customers.

There is nothing inherent in the economics of financial crises that makes slow recovery inevitable – they just require that policymakers figure out how to engineer more spending in their wake, same as in response to all other recessions.

Rather, the real problem they pose to policymakers is that engineering such spending increases in the wake of financial crises often requires policy responses that seem unorthodox or radical relative to the very narrow range of macroeconomic stabilization tools that enjoy support across the ideological spectrum. To put this more simply – they require policymakers do more than watch the Federal Reserve pull down short-term interest rates. For decades, all recession-fighting was outsourced to the Fed’s control of short-term “policy” interest rates – this despite the fact that in the U.S. this recession-fighting tool hasn’t actually been all that successful since the 1980s (see Table 2 in this paper).

The best response to a recession that is either so deep or so infected by debt-overhangs that conventional monetary policy is not sufficient, is simply to engage in lots of fiscal support – think the American Recovery and Reinvestment Act (ARRA) – but (as Ezra notes) much, much bigger in the case of the Great Recession.

But, this kind of discretionary fiscal policy response to recession-fighting (and jobless-recovery fighting) had fallen deeply out of favor in the same decades that saw increasing reliance on conventional monetary policy[1]. In fact, advocating fiscal policy that was up to the task of providing a full recovery in the wake of crises that defanged conventional monetary policy somewhere along the way got labeled radical, rather than simply nuts-and-bolts economics.

Further, this rejection of discretionary fiscal policy was done on very thin analytical reeds – essentially the fear was that it took too long to debate, pass, and see an effect from fiscal policy – and that if the recession was “missed” in real-time by policymakers, we would end up providing lots of fiscal support to an already-recovered economy – and might even cause economic overheating that would lead to runaway inflation and interest rate spikes.

This fear led to the strange mantra in the debate over fiscal stimulus in 2008 that policy had to be targeted, temporary and timely – which basically ruled out most things but tax cuts. But, given that the last three recessions have seen extraordinarily sluggish return to job-creation in their wake, this timely obsession was clearly misplaced (and, plenty argued so in real-time).

What we’ve been experiencing the last three years is the fall out of a financial crisis exacerbated by extremely bad policy.  It’s easy to pin the blame on the recalcitrant republicans who are willing to tank all of us to regain the White House, but there’s definitely some blame to pin on the Obama White House. It’s clear that the White House  simply did not manage the situation well at all.  The question that keeps me up nights is this.  Has the Obama administration learned its lessons?  I’m not certain on that.  But, I am certain that if some one like a Herman Cain gets in, there will be more hell to pay in terms of inexperience and bad policy than if we muddle through with more Obama incompetency.  I’m not sure if Romney will be about as inept as we’ve seen the current occupant or will be lead to worse policies of the sort put forth by the Cains and Bachmanns.

Bivens wonders who the Democrats are that suddenly decided that that nothing could be done about recessions except to dither and hope for the best efforts by the FED. Hoping for miracles from the Fed at the zero bound is delusional.  There is no historical or theoretical argument for any of this silly behavior.  We continue to see the deficit hawk arguments on all sides to the point that one can only assume that there’s very little difference between Republican and Democratic orthodoxy on voodoo economics any more.  This includes shilling for useless tax cuts.

But, I would also want to make sure to include much of the policymaking apparatus of the Democratic Party, who became far too enamored of the unalloyed virtues of deficit-cutting in the past two decades. The excellent labor market performance of the late 1990s, for example, is labeled a pure result rather than an important cause of substantially lower budget deficits during that time. And the regressive and stupid tax cuts pursued under the Bush Administration were generally not fought on the grounds that they were regressive and stupid, but that they would lead to intolerably large deficits – deficits so large they might even lead to Greek-like financial crises when, in fact, deficits as a share of GDP averaged less than 2 percent in 2006 and 2007. To be clear – the Bush tax cuts were expensive as well as regressive and stupid, and letting them (or at the very least the most regressive set of them) expire would be a real policy victory, freeing up public resources for much more valuable ends. But they did not cause deficits in the 2000s to reach terrifying levels.

Sadly, this same Democratic policy apparatus seems to be repeating many of these mistakes, by continually insisting that aggressive maneuvers to help alleviate the jobs-crisis must be done simultaneously with efforts to close what are actually pretty non-scary medium term deficits. Would the “very-big-stimulus-now-cum-progressive-measures-to-bring-medium/long-term-spending-and-revenues -in-balance-when-we-get-back-to-full-employment” plan be the best of all worlds? Sure.

So, what changed between the Reagan legacy of huge deficits “as far as the eye can see” or the “deficits don’t matter” mantra of old Dick Cheney to the mantra now that only deficits matter?  What’s caused this idea that you can spend hugely on unjustifiable wars, bailing out failing banks and businesses, and giving tax cuts and credits to every one under the sun with no real rationale but you have to say no now to stopping macroeconomic seppuku?  To a certain extent, we have Robert Rubin to thank for that.  Many of Rubin’s acolytes are still planted in the Treasury and were sent to the Obama White House early on.  Here’s a brief bit on that from an Allan Blinder Working Paper at Princeton that gives a good overview on how our approach to fiscal policy went completely off the track.

The fact that the Clinton boom started almost immediately after Congress passed a budget reduction package gave rise to some rethinking—some of it serious, some of it muddled—of even the sign of the fiscal-policy multiplier. Among politicians and media types, the notion that raising taxes and/or cutting spending would expand (rather than contract) the economy took hold rapidly and uncritically—with seemingly little thought about exactly how this was supposed to happen. Quicker than you can say “Robert Rubin,” the idea that reducing the budget deficit (or increasing the surplus) is the way to “grow” the U.S. economy—even in the short run—came to dominate thinking in Washington. This thinking was, of course, profoundly anti-Keynesian.

Is this why no longer seem to be able to get our act together and just do the basic right thing when it comes to helping US consumers deal with the Great Recession and its ongoing aftermath?   That would seem feasible except that right after 2001, George W Bush and and Allan Greenspan went right back on the stimulation on steroids policy of previous administrations. Both parties want happily along with that.   So, I continue not to get it and the policy continues not to get it right and if you look measurements of economic health like defaults and unemployment, it’s pretty clear that US Households aren’t going to get any thing either.  It’s no wonder people are starting to take to the streets.